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Property Investment

Any property that is purchased with the intent of gaining a return is considered as a property investment.

Property has always attracted investors. Unlike many other types of investment, such as shares and bonds, property is a tangible asset: if you own a property, or a part of it, you can see it. Bricks and mortar are just that – not pieces of paper that could lose their value overnight. And even though property valuations can fluctuate, the property is still there.

Property investment can be any type of building from a residential house, empty land or a commercial property. Typically the property isn’t occupied by the owner and is purchased specifically to generate profit through rental income and/or capital gains. In some cases, however, the owner may occupy a portion of it.

When handled correctly, purchasing a property for investment can prove lucrative for both business and individual alike, whether one simply hopes to purchase a home or plans to make a business out of such investments.

Whatever your reasons, property investment may help you achieve your objectives. Holborn advisers can help you as part of a wider investment portfolio.

Residential Property

Whether to create a handsome annuity pay-out for your retirement, or as a way to avoid inheritance tax penalties, there are many reasons to consider property investment.

It is true that the property market has suffered much loss in recent years. However, with favourable interest rates, many repossessions and banks looking to claw back public confidence, now might be an excellent time to invest in the property market.

If you are ready to take the plunge, consider the following tips.

Financing

After you invest in another property, a big part about profiting from it is making sure that the financing is in place. Property investment is not like operating a retail store where you buy something wholesale for £10 and sell it for £20.

First, you must identify your goals and determine if you want to rent the house and ultimately, once paid off, have a nice annuity, or if you want to move the property on quickly for a more short-term profit. If you are looking to the latter and you’re confident that you can find a buyer, consider an adjustable mortgage with a very low temporary interest rate. These adjustable rate mortgages have been the source of a lot of problems, but if you know you can sell for a profit before the mortgage resets (2 to 5 years), you can maximise your cash flow by paying only the interest, thus making the capital the buyer’s responsibility.

For longer-term investments however, fixed mortgages are better because they allow you to plan your cash flow accordingly and get by when things are tougher.

Many people who invest in property may be in a hurry to pay off, but remember; you are using rental income to help subsidise the mortgage payment. If you have a long-term strategy, you can rest assured, knowing that someone else is paying more of the interest and capital each month than you.

DIY

When you invest in any property, money is made or lost behind the scenes, not when the final deal is made. For example, you may have turned a £10,000 profit on the sale price after one month, but if you pay your solicitors £1,000, your contractors £5,000, and your estate agent fees £5,000, you will have lost money on your deal.

Additionally, the right improvements to your property can really add some value. Hire professionals to do these things for you only if you need the help. You certainly do not want to do something you are not capable of doing. Consider the skills you have and what really needs to be done to get the place up to scratch. In terms of other professional services, consider avoiding a Letting Agent who would take a valuable percentage of your rental income.

You may be surprised to learn that there are many tasks you can do yourself, without having to pay someone else. However, if you really must remain hands-off on everything, make sure that you budget accordingly so that profit is not swallowed up and costs do not spiral out of control.

Use help where appropriate

Just as in any venture, it is tough to go it alone. Hire the estate agents when it makes sense. For instance, if an estate agent comes along and can find you a buyer three months sooner than you can on your own, paying that commission may be far better than paying two more mortgage payments. Hiring a solicitor to handle some of the paperwork for issues pertaining to the contract and title deeds might free up some more time to find the next deal or finish painting the investment property. More importantly, if this is your first deal, having a paid advisor might make sense to make sure you avoid any stumbling blocks or legal entrapments. Certainly, you should learn from this engagement as it might be possible to handle it yourself the next time you invest, therefore saving yourself some fees.

Know market trends

If you are new to the market, you have a disadvantage over the other more experienced businesses and individuals. Whilst you can’t gain overnight experience, you can educate yourself on as many of the issues and trends as possible. Research house and rental prices online and in the press and you can even visit homes that may be similar to the one that you are going to list. Contact the local banks and see what is really happening in terms of mortgage rates and deposits. Use this knowledge to avoid paying too much and perhaps even negotiate a better deal.

Make real investments

When investing in property besides your primary residence and building your empire (regardless of the size), the most important rule is to just practice basic business principles. Your goal is to sell something for more than it cost to buy it and repair. When renting, you are relying on rental income to subsidise a fair amount of your mortgage, but not the entire amount. Dreams of making a “quick buck” will likely lead you to trouble, but making sensible, business-focused decisions should allow you to extend your property portfolio outside of your home.

Holborn Assets can help you with the structuring of your property purchase, the management of your finance, the individual structure employed on each of your deals and the strategy applied to your overall portfolio. We’ll answer your questions making sure you are 100% clear every step of the way.

Contact us today for more information.

Commercial Property

Commercial properties are usually divided into three main categories, in order of size and value:

  • Retail property – warehouses, high street shops, shopping centres, supermarkets and department stores
  • Office property – office buildings and business parks
  • Industrial property – the smallest category by value, covering industrial estates and distribution warehouses

There are some exceptions to these categories, which include properties in the leisure sector such as hotels, pubs and cinemas.

To invest successfully in commercial property requires as much skill and expertise as investment in the stockmarket. In addition to an understanding of the risks involved, both require an assessment of the current and future condition of the economy, as well as its potential impact on the company or property being considered for investment. For example, a sharp rise in short-term interest rates will undoubtedly affect consumer spending, therefore reducing the investment appeal of shops and other retail property.

Investors should also take other factors in to consideration, such as location, the lease terms and making sure the property is suitable for the use to which it is put. Additionally, investment in property is not just a matter of making purchases then sitting back and collecting rents until the lease expires. To maximise returns, investors need to take an active approach to property management. For example, refurbishment, change of planning use and a renegotiation of lease terms can all add to the overall return from a property.

Why invest in commercial property?

One of the most widely accepted principles of investment is that diversification reduces your risk. There are a variety of reasons why private investors should consider commercial property as part of their overall investment portfolio.

Income yield

Regular reviews mean that property rent can keep pace with inflation. This process takes account of rents on similar properties. Additionally, where existing leases are being extended, upward only rent review provisions stop rents falling to market levels on the extended lease. General market conditions will also have an impact. In the early ’90s for example, rents for new tenants fell significantly below those paid by existing tenants.

Diversification

One of the most widely accepted principles of investment is that diversification reduces your risk. In the context of shares, this means that you should hold a broad spread of shares across the main market sectors. A range of holdings – as provided by a unit trust – will mean that if one company fails, you do not lose all your money. But you will still not be immune from a general decline in stockmarket values, as happened between the start of the new millennium and early 2003.

This is where diversification across investment classes plays an important role.

The market cycle for commercial property is not closely linked with that of bonds or shares. According to research by some of the leading investment banks, over the period 1970-2002, there was only a limited correlation between the performance of commercial property and that of UK shares and gilts. Gilts were much more closely correlated with UK shares than property to shares or property to gilts.

Volatility

Returns from commercial property investments have been much less volatile compared to those from investment in shares. Part of the reason for this is the high level of income, which makes property investment similar in some respects to investment in fixed interest securities.

Yield calculations

Rental yield is one of the most commonly quoted yardsticks for comparing property investments. At its simplest, yield is calculated as Rental income/Property value x 100%

So, for example, if an office property is worth £15,000,000 and has rental income of £900,000, its yield is calculated as: £900,000/£15,000,000 x 100% = 6%

A property’s yield can vary as a result of a change in the rental income and/or the property value. For example, if the rent on the office property increased to £1,200,000, the yield would rise to 8%. For its yield to stay at 6% with the higher rent, the property’s value would have to rise to £20,000,000.

Commercial property can offer the benefits of regular income and potential capital growth together with healthy diversification. To find out more, contact a qualified Holborn Assets adviser today.

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